Hedge funds face scrutiny

Hedge fund managers have been warned they will come under increasing scrutiny from the corporate regulator, which has expressed concern that the complexity of some funds could be leaving consumers in the dark about their investments.

Australian Securities and Investments Commission (ASIC) executive director of financial services regulation Ian Johnston said last week that the regulator would pay much closer attention to hedge fund Product Disclosure Statements (PDSs) to ensure they are complying with the requirement that they be “clear, concise and effective”.

In an address to a hedge fund industry conference in Sydney, Johnston said: “The clear, concise and effective test has particular relevance for alternative investments, including hedge funds, and will be the subject of increasing attention from ASIC in coming months”.

Johnston said the regulator had previously held back in using its authority to block PDSs “principally to allow the market to get accustomed to the financial services reform compliance”.

However, a recent review of over 100 PDSs, including those from hedge funds, had revealed a significant problem areas, he said.

Johnston, who acknowledged his speech was meant to be “provocative”, also broached the topic of whether some hedge funds were unsuitable for retail investors.

“Could it be that some alternative investments, and associated investment strategies and risk, are so complex that it is impossible to describe them in clear, concise and effective terms?” he said.

“Does this mean that some products or strategies should not be marketed to retail investors simply because explanations about them cannot be conveyed in simple terms?”

He emphasised, however, that it was not ASIC’s intention to ban some hedge funds from marketing to retail clients.

Johnston said special emphasis should be placed on fees and charges in a hedge fund PDS to “ensure investors are clearly told the fees they will be charged to invest in a fund”.

Advisers who recommend hedge funds and other alternative investments will also come under increasing scrutiny, Johnston said.

“The sort of check we might make when examining an SOA [statement of advice] is to ensure that there is a clear explanation to the client to support a particular investment strategy,” he said.

“We would want to be satisfied that clients who are advised to invest in alternative investments are provided with reasons and explanations.”